The subject of the UK economy has been greatly discussed since the decision to leave the European Union back in June 2016. Brexit and the subsequent drop in the value of the pound has led to an uncertainty of what effect this decision will have on the operations of UK-based businesses.
Last week brought no more certainty to the financial environment UK-based businesses find themselves operating in, with the Bank of England (BoE) using the quarterly meeting of their Monetary Policy Committee (MPC) to make the decision to increase interest rates.
The decision was favoured seven to two in a vote by the MPC, who believed raising it from 0.25% to 0.5% would help alleviate the issue of rising inflation, where September saw the inflation hit a record 3%.
If the inflation rate saw any additional growth, it would result in BoE Governor Mark Carney having to write a letter to Chancellor Philip Hammond to justify why inflation rates were not kept lower. In the end, the only tool the BoE had at their disposal was to raise interest rates in order to ease rising inflation. Despite the increase, the EY ITEM Club’s chief economic advisor Howard Archer has suggested that further increases in interest rates will be kept to a minimum whilst the Bank of England attempt to restrain the rising inflation and expanding debts without causing a detrimental impact on UK economic growth.
The last time interest rates were increased was over a decade ago in July 2007, after a period of record-low rates that allowed the UK economy to recover from the previous devastating financial crisis.
Following the uncertainty of the Brexit decision, the MPC believed dropping rates by 0.25% would allow the UK economy to survive against the backlash of the decision.
Yet, the implementation of increased interest rates, along with Brexit, could result in many UK-based businesses struggling, experts have warned. According to specialists, the number of UK businesses currently experiencing financial distress is up 27% more than it was a year ago when the impact of Brexit was not yet realised. Amongst the worst affected include the professional, support, construction and retail sectors. The worry for many is that these figures could rise as a direct result of the amplified interest rate, with many businesses unable to rely on the cheap credit and cheaper labour they have become accustomed to.
Recent warnings from Mark Carney suggest that the BoE may not be able to cut interest rates in future if we are faced with a bad Brexit deal. Speaking on the Peston on Sunday show, Mr Carney outlined the possibility that a hard Brexit could prevent the BoE from reducing rates, even if the economic growth slowed.
It appears that no part of the economy has been left unscathed in the last year, with rising inflation, corporate liquidations and dropping retail sales, in addition to the crucial construction sector seeing further decline. Reports indicate that alongside the rising interest rate, increased minimum wage and other employee expenses could have a huge knock-on impact on businesses.
Not only could higher interest rates impact the cost of borrowing money, but it could also affect consumer spending habits as wage increases fail to match the rising price of goods.
Despite the bombshell, good news comes in the form of an announcement from Chancellor Philip Hammond, who indicated there will be changes to the proposal of rising business rates and VAT charges that was expected to come into play next spring. The decision from the Conservatives to abolish the 3.9% rise in business rates comes after protests from the British Chamber of Commerce and British Retail Consortium.
However, companies still have many issues to consider in their strategic planning for the upcoming year. One problem is how to get their consumers to buy in times of financial uncertainty; another is how their businesses will be able to reduce their costs to ensure healthy ROI’s in an unstable economic climate.
So, how can businesses react to such issues in the British economy? First is by understanding their consumer and ensuring their products, services and communications speak to the fundamental needs of both loyal and potential customers. The second is to utilise business cost management to dissect the operational costs of the business and identify key areas for savings; this is where the specialists at Expense Reduction Analysts will be able to help. If you are worried about how the rising interest rates will affect your business, our banking and payments team will be able to help, so get in touch with us today. We will be able to help you ensure your business is operating at its best capacity during these uncertain times.